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U.S. Stock Market Crash Risk, 1926-2006

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  • David S. Bates
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    Abstract

    This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the "leverage" effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14913.

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    Date of creation: Apr 2009
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    Handle: RePEc:nbr:nberwo:14913

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    Cited by:
    1. Lu, Yang & Siemer, Michael, 2013. "Learning, Rare Disasters, and Asset Prices," Finance and Economics Discussion Series 2013-85, Board of Governors of the Federal Reserve System (U.S.).

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